Property Futures

Real Estate News, Reviews and Investment

Rental residential property in California could produce attractive returns

Article: Prices for houses are reasonable in California and rental demand exists.

California has performed best when it comes to the recovery in housing prices and has recorded double-digit growth year on year for 8 months consecutively.  6 of the top 7 cities, which saw prices grow by 20% in February over the same month of the previous year, are in California.

Source: EHow.com

Source: EHow.com

While this might seem as if we looking at another bubble, there is nothing to be worried about (despite the bidding wars and the steep increase in prices).

  • If you look at the situation in the proper perspective, prices are still over 20% below the peak and many house owners have lost more than 50% of the value of their property.

Moreover, there are good reasons for the sharp spike in prices.

  • California’s coastal regions have registered strong job growth and, as a result, there are more buyers in the market (which in turn allows owners to increase prices because of increased demand).
  • Housing inventory is at its lowest for 10 years, which also contributes to higher prices.
  • Tighter lending criteria mean that mortgages are not available to buyers who shouldn’t have qualified in the first place.

 

The residential property market in California

Experience suggests that recoveries in the housing market are driven by increased demand from people looking for a place to live. But this time, investors seem to be leading the charge.

This is worth noting because the housing bubble has been attributed to excessive speculation.

  • These investors are investing with a long-term outlook with a preference for real estate over, say, the stock market.
  • There is plenty of interest in buying foreclosed homes because of the rental income, which offers superior returns in a low-interest-rate environment.
  • Investors have often had a small presence in the housing market but, currently, people buying with cash (mostly investors) account for about a third of the market.

The predominance of investors suggests that this is the beginning of the rental boom and home ownership has declined to around 65% from 69% in 2005.

Because investors have a stake in maintaining their investment properties properly, they also have an impact on neighborhoods that have been negatively impacted by falling prices and foreclosures.

The rental market has long been the preserve of small investors and retirees but, increasingly, large companies are entering the market.

  • For instance, Blackstone has spent $3.5 billion purchasing homes.
  • Executives in these companies say that the rental market for single-family houses is promising because prices are relatively low and rentals are at attractive levels.  They expect the market to grow because many people do not qualify for mortgages in the current environment.
  • Moreover, many families who lost their houses to foreclosures are now renting houses.
  • Investors are also concentrating on areas where housing is relatively cheap and rental demand is growing because of growing employment.
  • Housing is also a good investment for relatively inexperienced investors.

The bottom line

Investment in rental property in California seems like a good idea when you consider that returns on investment, by way of rental income, are superior to other forms of investment in the current low-interest-rate regime.

However, you should ensure that you do not overpay and that rental demand exists.

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